The recent Autumn Budget 2024 has introduced changes to inheritance tax (IHT) rules, particularly concerning pensions, set to take effect from April 2027. Currently, defined contribution pension funds are largely protected from IHT, making them a valuable tool in estate planning. Under the existing framework, these funds remain outside the estate and are not subject to IHT, allowing for tax-efficient transfer of wealth. This has especially benefited beneficiaries when the deceased was under age 75, as pensions could often be passed tax-free. However, this favorable treatment will soon change.
Starting in 2027, defined contribution pension funds will be included in the deceased’s estate for IHT purposes, bringing them in line with other assets like property or savings. This means that, when passed to beneficiaries other than a spouse or civil partner, these pension funds will be liable to the standard 40% inheritance tax if the estate value exceeds the IHT allowances.
These adjustments may prompt individuals to reconsider their retirement and estate planning strategies. This shift represents a substantial departure from prior pension reforms, positioning pensions less as inheritance vehicles and more as sources of retirement income. With consultations continuing, further adjustments and clarifications may emerge before the implementation date.
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